On Friday, U.S. Treasury Secretary Janet Yellen rebranded the Biden administration's economic agenda as modern supply-side economics, using a Reagan-era phrase favored by Republicans to claim that Democrats spending plans will boost the U.S. economy's productive capacity.
Yellen said in a speech to the World Economic Forum that she wants to increase labor supply and improve education and research, rather than tax cuts and deregulation, to boost potential U.S. growth and ease inflationary pressures.
Our new approach is more promising than the old supply side economics, which I see as a failed strategy for increasing growth, Yellen said. The tax cuts on capital haven't achieved their promised gains. Deregulation has a poor track record in general and in relation to environmental policies - especially with respect to curbing CO 2 emissions. Yellen did not announce any policy changes when she introduced the concept, which suggests it may be a new tactic to persuade Americans and moderate Democrats in Congress to support the Build Back Better social spending and climate investment plan, which stalled in December.
President Joe Biden spoke to mayors on Friday about his administration's efforts to expand the U.S. workforce and increase productivity, which could help qull inflationary pressures while supporting a stronger growth rate.
The administration is trying to sabotage the political fallout from high inflation that hit 7% last month, as labor, housing and goods shortages, the biggest annual increase in nearly 40 years, and counter claims that further spending would fuel further inflation.
With the election of Ronald Reagan as president, Yellen's vision of supply-side economics would differ greatly from the Reaganomics version that burst into the mainstream in the 1980s.
Then, lower taxes and lighter regulation were touted as a fuel that would make U.S. businesses more competitive and profitable, unleashing capital investment that would trickle down to the wider economy, fuelling growth and hiring.
At the same time, Republicans claimed that the tax cuts would pay for themselves through turbocharged growth - a phenomenon that has never come to pass.
Yellen argued that the supply needs of the economy center around the availability of labor, which has been constrained by the pandemic and in the view of Democrats by the absence of policies around things like child and elder care that could allow more people to join the workforce.
Two years of universal early childhood education and an expanded earned income tax credit were identified as core components of the Build Back Better plan going forward, according to Yellen.
She stated that Republican-passed tax cuts in 2017, rather than encourage investment in the United States, have perpetuated corporate tax incentives that have encouraged companies to shift productive capacity overseas as countries compete on taxes. The deal for a 15% corporate minimum tax, which depends on the passage of Build Back Better for implementation, would end this race to the bottom, she said.
The modern supply-side economics seeks to spur economic growth by both increasing labor supply and increasing productivity, while reducing inequality and environmental damage, Yellen said. We are not just focused on achieving a high topline growth number that is unsustainable - we are instead aiming for growth that is inclusive and green.